The Gold Stock Strategist's  Instablog

On August 7, the European Central Bank (ECB) and 18 other central banks signed an extension of the 5-year Central Bank Gold Agreement (CBGA). The current CBGA caps sales at 500 tons a year and expires on September 26. The new CBGA extends the agreement for another 5 years—through 2014—with a ceiling of 400 tons per year. The ECB issued a press release on the agreement at their website.

Observers suggest that the agreement is positive for the price of gold because it removes the risk that central banks in Europe will sell bullion indiscriminately, flood the market, and drive the price down. However, based on recent actions, signatories to the CBGA do not seem anxious to sell their gold reserves too quickly. Actual gold sales by signatories to the CBGA in 2008 were 343 tons, well below the 500 ton per year ceiling.

According to GFMS, sales by all central banks were 39 tons for the first half of 2009, well below the 2008 pace. The largest sellers during this period were France and the ECB. Moreover, CBGA signatory Swiss National Bank has indicated they have no plans for any further gold sales in the foreseeable future. Switzerland, with gold holdings amounting to 1,040 metric tons, is the 7th largest government holder of gold in the world.

The International Monetary Fund (IMF) is not a signatory to the agreement and is reportedly intending to sell 403 tons or 12 percent of its 3,217 tons of gold to central banks. The IMF is the third largest official holder of gold in the world. Speculation is that nations with considerable U.S. dollar reserves like China or middle eastern oil producers might buy large portions of the proposed IMF gold sales.

The CBGA is more neutral than bullish for the price of gold because it represents a very high ceiling on annual gold sales relative to recent actual sales. The new agreement, combined with the large proposed sale of gold by the IMF, results in official gold sales levels that are roughly in line with the previous CBGA. Though not bullish for bullion, the agreement does provide a theoretical and unknowable floor for the price of gold because of the limit on sales.

Disclosure: Long GLD

Newmont Kicks Off Major Gold Producer Earnings Season This Week

More »

 

There are several ways to value large gold producers. One of the conventional methods is to use “price to earnings” ratio calculations, commonly referred to as “PE”.   This method of analysis is the one of the most basic valuation techniques.  Lower PE ratios suggest a company is undervalued relative to competitors. PE ratios are best used as a “first cut” in due diligence to see how the market is valuing gold mining companies relative to others in the industry.

More »

 

More »

I've been following emerging junior gold producers for 5 years and cannot remember such a prolific level of secondaries and private placements as we have seen over the past four months.

I did a quick Google search and came up with the following list of gold producers and explorers that have recently raised money through equity rather than debt placements. Several of these companies are followed by the Gold Stock Strategist (in bold).

Acadian Mining
ATW Venture
Alamos Gold
Capella Resources
Dorato Resources
Garson Gold
Great Basin Gold
Hawthorne Gold
IAMGOLD
Jaguar Mining
Kinbauri Gold
Kinross
Luna Gold
Metanor Resources
Novagold Resources
Northern Tiger
Osisko Mining
Queenston Mining
Silvercorp Metals
Sulliden
Timmins Gold

Okay, I know Silvercorp (NYSE: SVM) is a silver producer. But I also own shares in and follow Silvercorp and the point of inclusion on the list is that the rush to equity financing is not limited to gold explorers and producers but also to silver miners.

Kinross? IAMGOLD? Why are they raising capital?

In a nutshell, there are three takeaway points from this list.

(1) Bank lending has dried up due to the global financial crisis. Even if you are a top notch risk and banks want to loan you money, it will take months because of the higher due diligence standards and regulatory requirements needed to close the loan deal. Equity financing can be completed more quickly and miners believe time is of the essence.

(2) The gold mining sector believes this is a once in a lifetime opportunity to advance projects forward more quickly than earlier planned and they feel an urgency to maximize production within the next 12-24 months. The extraordinary monetary and fiscal policy measures taken by the largest and most productive industrialized nations in the world point to much higher inflation once the credit markets bottom out. More fiat currency chasing a stable amount of goods is a classic recipe for inflation and the price of gold as a store of value has historically risen in price during times of inflation.

(3) Quality projects are finding equity financing very easily.

I believe all these points, but especially the third point, is bullish in the long-run for companies that have raised capital through secondaries and private placements over the past 4 months.

As a final note, creative equity financing (including mergers like New Gold and Western Goldfields and Vista Gold selling Allied Nevada shares) are other non-debt approaches to finance development and are likely to increase in the emerging junior gold producer sector.

More »